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Paper Stats:
Abstract Views: 1561
Downloads: 422
Download Rank: 9586
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Explaining Returns with Loss Aversion
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TYLER SHUMWAY
University of Michigan at Ann Arbor
November 20, 1997
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Abstract:
I develop and test an equilibrium asset pricing model based on loss averse investors. The model specifies a pricing kernel that is a nonmonotonic function of the market return. It also implies that investors demand a higher risk premium for risk associated with negative market returns than for positive market returns. The model assumes rational expectations and is consistent with no-arbitrage pricing.Estimates of the model's parameters are similar to values reported elsewhere. As the loss aversion literature predicts, the accuracy of the model depends on the frequency with which data is observed. Consistent with Benartzi and Thaler (1995), the model explains annual returns better than competing models, but it does not explain monthly, quarterly, or half-year returns. The model fits both returns that reflect the equity premium and stock returns alone.
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JEL Classifications: G12
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Working Paper Series
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Suggested Citation
Shumway, Tyler, "Explaining Returns with Loss Aversion"
(November 20, 1997).
Available at SSRN: http://ssrn.com/abstract=58442
or DOI: 10.2139/ssrn.58442
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Contact Information for
TYLER
SHUMWAY
(Contact Author)
Email address for TYLER
SHUMWAY
University of Michigan at Ann Arbor
Ross School of Business
701 Tappan Street
Ann Arbor
, MI
48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)
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